BRASILIA, Feb 19 (Reuters) - Brazil will seek to reduce the dollar amount of vehicles that Mexico sells duty-free to the South American nation, two sources familiar with the matter said on Thursday, raising tensions in upcoming trade negotiations between Latin America's largest economies.
Mexican and Brazilian officials will start talks on Friday over an automotive treaty due to expire on March 19. Mexico is pushing to upon up trade as its auto industry booms, while Brazil wants to renew a quota on light vehicles that protects its struggling factories.
The agreement, signed in 2012, calls for the free trade of vehicles after quotas expire.
"Brazil wants to lower the quotas as a way to reduce the deficit with Mexico," said the source, who asked for anonymity to speak freely.
The source said Brazil wants to extend the quotas while it negotiates a broader free trade agreement including heavy machinery and food.
Another source said Brazil may seek a "marginal" reduction in the quota.
The treaty allows Mexico and Brazil to sell each other up to $1.64 billion worth of vehicles a year. Exports above that amount are subject to tariffs of up to 35 percent.
The long-running dispute threatens to hurt the countries' ties and shows the growing differences between efforts by Mexico to open up its market and actions by Brazil to protect its industry.
"For us, it is fundamental to return to free trade in March as agreed," Mexico's undersecretary of foreign trade, Francisco de Rosenzweig, said in an interview.
In an interview with Reuters last week, Brazilian Trade Minister Armando Monteiro said the country wants to renew the deal, leaving open the possibility of lower quotas.
A renewal of the quotas could threaten any efforts to open up trade.
"The renewal of the system goes against free trade and may hurt any ambitions to lock in a wider agreement," said Thiago Soares, a trade expert with Brasilia-based consultancy Barral M Jorge Associates.
Although Brazil remains one of the world's five biggest auto markets, its industry has struggled with high taxes, infrastructure bottlenecks and rigid labor laws.
Output at Brazilian factories, most of them run by Fiat Chrysler, Volkswagen, General Motors and Ford, dropped 15 percent to 3.15 million vehicles in 2014.
Meanwhile, Mexico's auto industry is booming as demand grows in the United States. Mexican auto output rose nearly 10 percent to a record 3.22 million vehicles in 2014. (Additional reporting Ana Isabel Martinez in Mexico City; Writing by Alonso Soto)